Yukos runs out of steam after default

It emerged today that French banking giant Société Générale fired off a warning to the Russian producer on Friday in a move that brings the prospect of bankruptcy ever closer.

Yukos shares, expected to dive after a weekend police raid, fell 13% to 180 roubles at the start of trade on Moscow's MICEX exchange. World markets were already on tenterhooks to see if the group carries out its threat to cut output this week.

Bailiffs wanting back taxes have frozen its bank accounts, sparking a warning from the firm that it may have to start turning off the taps on its daily 1.75m barrel output.

With about a third of Yukos oil exported, and global supply and demand tightly matched, a sudden fall in supply of some 600,000 barrels a day would cause a significant jump in crude prices. Today, Brent rose 63 cents to $36.55 a barrel.

However, some analysts view the warning as the latest move in escalating brinkmanship between the company and the Russian government.

The two sides may yet reach agreement over the £1.9bn back tax bill, which would enable the firm to continue operating normally, analysts predict.

And, even if Yukos' export ability were severely impaired, other producers would be able to plug some - if not most - of the gap, given that the Russian market is oversupplied.

Last week, bailiffs entered Yukos' headquarters with an execution order demanding 99.4bn roubles (£1.9bn) in tax from 2000 and the freezing of access to working capital. Company founder Mikhail Khodorkovsky is facing trial on State charges of tax evasion.

Yukos says the latest move could force it to halt operations 'of strategic importance for Russia's fuel and energy industry' while also threatening its ability to pay current taxes and meet obligations to creditors.

It offered to settle the claim with its £2.2bn, 35% stake in Chelsea FC owner Roman Abramovich's Sibneft oil company.

Although that was declined, Christopher Granville, chief strategist at Russian broker UFG, expects the government will end up accepting the shares, which he says is 'the rational and civilised way to go'.

Ronald Smith, oil and gas analyst at Renaissance Capital, agrees: 'I think they're going to end up negotiating something and I think they will stop short of bankruptcy.'